Question

Denise is now ready to begin valuing the nail salon. This year the business did $70,000, which is about the same as it did the previous four years. The owner has switched hours of operations and services offered a few months back and the impact is yet undetermined. Denise plans to make significant changes in the business and will be open nearly 25% more than before, so she’s optimistic that her income is likely to be higher. Also, a beauty salon in the same strip mall has just decided to no longer do nails at all.
The equipment in the salon, although not fully depreciated, is obsolete and needs to be replaced. The salon carries the name of the current owner and Denise intends to keep that anyway so as not to confuse the large number of customers the current owner currently has. A local news segment filmed the shop for a segment on successful small businesses that should appear on the nightly news sometime later this year.
While researching the industry, she found another nail salon that sold for $50,000. It had made $500,000 over the past five years. Her research further showed that the industry was so new that reliable estimates of value were not yet developed.
Consider the four typical valuation tools mentioned in the text. Which ones should she probably not use and why? Which one should she use? What would be the valuation of this salon?